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IASB Meeting — 14–16 May 2019

Start date:
14 May 2019

End date:
16 May 2019

Location: London

Overview

The IASB met in London on 14–16 May 2019 to discuss nine topics.

The Board decided to add some minor amendments “sweep issues” related to its package of amendments to IFRS 17 Insurance Contracts to that package. Additionally, the staff provided a summary of the discussions of the Transition Resource Group for IFRS 17 (TRG) meeting held on 4 April 2019. (See our IFRS in Focus for a summary of the meeting).

For Goodwill and Impairment the staff responded to issues raised by the Board in April in relation to possible new disclosures that the acquirer of a business would be required to provide to help a user assess whether a business combination was a good investment decision and whether that business is performing as expected. The papers included a discussion of ways to present equity (or net assets) excluding goodwill. The staff are also suggesting that the Discussion Paper propose that the requirement for an annual test for impairment of goodwill and intangible assets with an indefinite life staff be removed and an indicator-only approach be used. The staff will bring their recommendations for preliminary views to be expressed in the Discussion Paper to the meeting in June.

One of the threads in the Disclosure Initiative is a targeted Standards-level review of disclosure requirements. The Board has been developing internal guidance for setting disclosure requirements which it decided to test on IAS 19 Employee Benefits and IFRS 13 Fair Value Measurement. The staff presented summaries of the outreach they have been undertaking since November 2018 and the different approaches they plan to take when reviewing IAS 19 and IFRS 13 disclosures. The Board was generally supportive of the approach.

For Primary Financial Statements, the Board decided to develop an Exposure Draft for a new IFRS Standard revising or replacing IAS 1 Presentation of Financial Statements, and that a Discussion Paper is not required.

The staff presented a summary of the feedback received on the Exposure Draft Onerous Contracts—Cost of Fulfilling a Contract (see our IFRS in Focus for a summary of the ED). Board members noted that the proposals received mixed feedback. No decisions were made.

Now that the IASB has published a revised Conceptual Framework, the IASB is considering whether IAS 37 Provisions, Contingent Liabilities and Contingent Assets should be revised. The staff are recommending that the Board align the definition of a liability in IAS 37 with the definition in the Conceptual Framework, including potentially replacing IFRIC 21 Levies with new requirements and illustrative examples in IAS 37. They also recommend that the Board clarify which costs to include in the measure of a provision and specify whether the rate at which an entity discounts a provision for the time value of money should include or exclude the entity’s own credit risk. Many Board members expressed a strong preference for keeping any proposed changes as narrow as possible. The staff will bring their recommendations to a future meeting.

In an an education session for Rate-regulated Activities the Board discussed ways to improve the understanding and clarity of the model that has been developed thus far.

The staff set out their approach to revising the Management Commentary Practice Statement and that the Board provide additional guidance on the objective of management commentary, how to consider qualitative characteristics of useful financial information when providing management commentary and the content of management commentary. Board members said that it needs to be clear what information is expected to be provided in the financial statements and what information is better presented in the management commentary. No decisions were made.

The Board decided that the IFRS for SMEs Standard should be aligned with new and amended IFRS Standards. The Board also thinks stability is important and they will consider ways to phase in updates. The Board also discussed IFRS 16 Leases to identify ways to simplify the requirements for SMEs.

Related Topics

Related Discussions

The purpose of this session was to discuss stakeholder feedback on the scope of a possible project to amend aspects of IAS 37, from outreach undertaken with the Accounting Standards Advisory Forum (ASAF), CMAC and Global Preparers Forum (GPF).

Background

The IASB has been considering possible revisions to IAS 37 Provisions, Contingent Liabilities and Contingent Assets for many years. The IASB issued exposure drafts in 2005 and 2010 that would have replaced IAS 37 with a new IFRS or made significant revisions to IAS 37. Neither proposal was finalised. As a result of the 2011 Agenda Consultation the project was placed into the research programme. Work also continued on the definition of a liability for the Conceptual Framework.

Now that the IASB has published a revised Conceptual Framework, the IASB is considering again whether IAS 37 should be revised. The Board is already undertaking a narrow-scope project related to onerous contracts.

The purpose of this session was to discuss stakeholder feedback on the scope of a possible project to amend aspects of IAS 37, from outreach undertaken with the Accounting Standards Advisory Forum (ASAF), CMAC and Global Preparers Forum (GPF). An overview of the potential scope is set out in Agenda Paper 22A, which is a paper prepared for the most recent meeting of ASAF. The feedback from these interactions is summarised in Agenda Paper 22B: Extracts from ASAF, CMAC and GPF meeting notes.

The staff are recommending that the Board align the definition of a liability in IAS 37 with the definition in the Conceptual Framework, including potentially replacing IFRIC 21 Levies with new requirements and illustrative examples in IAS 37. They also recommend that the Board clarify which costs to include in the measure of a provision and specify whether the rate at which an entity discounts a provision for the time value of money should include or exclude the entity’s own credit risk.

Additionally, as a result of feedback from recent outreach (see paper 22B), the staff want to investigate further the feasibility of clarifying the measurement objective in IAS 37 and whether there is a need to clarify which economic benefits to include in assessing whether a contract is onerous.

Staff recommendation

This session was educational rather than decision making. The staff asked Board members to comment on the stakeholder feedback and identify any additional information they will need to be able to decide the scope of the project.

Board discussion

The general tone of the comments made by the Board members who spoke was that the project should be narrow and focused.

The first Board member to speak suggested it would be better not to look at what costs to include in the measure of a provision. She thought this could not be addressed without addressing the measurement objective, and that was too broad an issue. She also thought that measurement could not be addressed without touching on the recognition threshold for litigation. In contrast, other members expressed support for looking at the measurement objective.

One member said the issue of levies elicited strong views at the CMAC meeting, and that is an area that should be explored as well as the treatment of credit risk. The staff said that constituents seemed wary of a project on IAS 37 because they thought it might address matters that the Board no longer plans to pursue.

One member views incorporating the new definition of a liability as being only editorial in nature and that the Board should not touch the recognition criteria in IAS 37. A member then expressed some concerns about how the new definition of a liability from the Conceptual Framework would fit with the IAS 37 recognition criteria. Another member echoed that concern and noted that the Conceptual Framework does not use “probable” in the recognition criteria. The staff response was that the Framework says the recognition criteria can be considered on a standard-by-standard basis. One possibility is to specify thresholds for low probability items in IAS 37 on the basis that recognising such items would not provide useful information.

Two members thought that consideration of the discount rate was important, and the issues were broader than credit risk. The session ended with disagreement between some Board members. One member, who had spoken earlier in the session, restated that they thought it should be kept as a very narrow scope project. In response another Board member said that it would be a lost opportunity to open a Standard and not eliminate known divergence.

The staff will bring papers back at a future meeting with their recommendations.

The Board discussed feedback received on its Exposure Draft 'Onerous Contracts—Cost of Fulfilling a Contract'. No decisionswere asked of the Board.

Feedback summary (Agenda Paper 12)

Background

The purpose of this paper was to provide the Board with a summary of the feedback received on the Exposure Draft Onerous Contracts—Cost of Fulfilling a Contract (ED) (please refer to our IFRS in Focus for the contents of the ED). The staff asked the Board for any comments or questions on the feedback. No decisions were asked of the Board.

Analysis of feedback

The paper was split between the key views on each of the two questions below, and an analysis of other matters.

The ED asked respondents:

Whether they agree that IAS 37 should specify that the cost of fulfilling a contract comprises the costs that relate directly to the contract rather than only the incremental costs (Question 1)

Whether they have any comments on the proposed examples of costs that do, and do not, relate directly to a contract (Question 2)

Question 1:

A significant majority of respondents agreed that the cost should comprise the directly related costs in addition to those incremental to the contract.

Respondents noted that this would be in line with the requirements of IAS 37, and that from a user’s perspective recognition of provisions for onerous contracts is important.

Six respondents disagreed with the proposed amendments for the following reasons:

It would impose additional costs on entities to measure costs using an incremental approach, and that the cost of the proposals may outweigh the expected benefits

Provisions would not provide useful information if an entity prices contracts considering only incremental costs, and that in these situations the outcome would be inconsistent with commercial reality

Conflict with the other requirements of IAS 37 (paragraph 63) which prohibits an entity from recognising future operating losses

Question 2:

Many respondents agreed with the Board’s proposals to include costs that do (and do not) relate directly to a contract. However, many respondents had questions or expressed concerns. These are described below.

Principle underpinning the examples:

Some respondents suggested the Board clarify the principle that underpins the proposed examples and include it as a requirement in IAS 37, for example ‘the directly related cost approach—includes all the costs an entity cannot avoid because it has the contract. Such costs include both the incremental costs of the contract and an allocation of other costs incurred on activities required to fulfil the contract’

Examples in the proposed paragraph:

Respondents asked for clarity on costs included in fulfilling a contract

In relation to salaries and wages respondents questioned if costs under IAS 19 Employee Benefits, such as pension costs should be considered in applying the proposed amendments

In relation to production costs, some respondents suggest basing the examples on those within IAS 2 Inventories as opposed to IFRS 15 Revenue from Contracts with Customers, as IAS 2 refers to fixed and variable production overheads and indirect costs

Deloitte said, in its view IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets have a different concept of “directly attributable” costs than IAS 2, but that IAS 2’s requirement more directly links to the Board’s proposals

General and administrative costs:

Many respondents suggested clarifying the treatment of general and administrative costs in order to better distinguish between costs that relate directly to a contract and general costs of operating

Some respondents said general and administrative costs can never relate directly to a contract, even if the costs are explicitly chargeable to the counterparty under the contract

Other matters:

Scope of proposed amendments:

The Board decided not to extend the scope of the amendments to include measurement and the meaning of the term “economic benefits”, as this was not prompted by withdrawal of IAS 11 Construction Contracts and expanding the scope would cause delay. Some respondents felt that it was not be beneficial to consider the cost of fulfilling a contract without also considering the meaning of economic benefits

Respondents suggested clarifying whether an entity is required to measure an onerous contract provision using the same costs it used to identify the contract as onerous. Other respondents asked for clarity as to whether and how the proposals would affect the measurement of liabilities with the scope of IAS 37 that are not onerous contracts

Respondents suggested clarifying the definition of a “contract”. IFRS 15 requires some contracts to be combined, respondents asked if IAS 37 would apply to the combined contract as defined by IFRS 15 or to each legally separate contract

Respondents also questioned the interaction of IAS 37 with IAS 36 Impairment of Assets.

Transition requirements

The Board proposed that entities would be required to apply a modified retrospective approach on transition

Respondents had mixed views on the proposed transition requirements, some respondents said that entities should be permitted to apply the requirements retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Board discussion

A Board member asked for confirmation of the logic of Vodafone’s response to the ED. It was detailed that the response from Vodafone suggests that when an asset is used to service many contracts, the cost of using that asset should not be included within the calculation of the onerous provision against any contract. The Board noted that the ED suggests instead that these costs would be attributed to the relevant contracts. The Board also noted that there could be a unit of account issue to consider, and how, when there are multiple contracts of a homogenous nature, the attribution of shared costs should be applied.

A number of respondents disagreed with the proposed amendments, on the basis of the outcome expected if an entity assesses contracts on the basis of incremental costs. The Board discussed that when an asset is idle, a provision/impairment may not be required. However, when subsequently the entity enters into a contract that requires the use of the idle asset, a new assessment would be required, which might lead to the potential recognition of a provision. Had the entity not entered into a contract, the onerous provision would not have been required.

Another Board member noted that the majority of responses appear to be views on practical application of the proposed changes in the ED, focusing on the simplicity of using the incremental cost approach, against the difficulty of using the directly attributable cost approach. The Board member generally disagreed with those respondents on the basis that well managed companies understand the cost base of their business to a high degree and that calculating the incremental or direct cost would not be a difficult exercise.

Another Board member highlighted the comment from EY that the definition of direct cost should be included within the proposed amendment to the Standard, as opposed to the Basis for Conclusions as currently suggested. The Board discussed that using an incremental cost approach leads to fewer instances of having to recognise provisions and also leads to smaller amounts being provided for. A Board member noted that the longer a contract spans post year-end the closer the definition of incremental and direct costs become aligned. Another Board member wanted to clarify the reason behind the diversity seen in practice in application of IAS 37. Some preparers used IAS 11 Construction Contracts criteria which match up closely with the proposed approach in the ED. Others looked to IAS 37 in isolation and said that incremental cost is an established practice. One member suggested the scope of the changes to IAS 37 should be limited to those construction contracts which were in the scope of IAS 11.

Background

The purpose of this paper was to ask the Board whether it plans to publish a Discussion Paper (DP) or an Exposure Draft (ED) to obtain feedback on the project proposals. The staff plan to seek permission to begin the balloting process on the consultation document at a later stage.

Staff analysis

The staff think that the Board has sufficient information and understand the potential problems and solutions to proceed without a DP. Furthermore, it would be more effective and efficient to publish an ED.

The staff considered whether to present the proposals as amendments to existing IFRS Standards or as a new IFRS Standard if the Board were to publish an ED. The staff preferred developing a new Standard because the Board could structure proposed and existing requirements in a clearer manner, improve the drafting of IAS 1 Presentation of Financial Statements without changing the requirements and a new Standard could be more prominent than the revision of an existing Standard.

Staff recommendations

The staff recommended that the Board publish an ED rather than a DP.

Board discussion

All the Board members supported the staff’s recommendation to publish an ED because they have a good understanding of the issues facing the project and because the project is focused on presentation rather than recognition and measurement, i.e. it will not change the fundamental principles set out in IAS 1. The Board members highlighted that it would be more efficient to publish an ED because better feedback can be provided on a more precise drafting which is difficult to achieve with a DP. The Board members recommended that the staff consider the pros and cons of developing a new Standard for this project during drafting.

Board decision

All 14 Board members voted in favour for issuing an ED instead of a DP.

Sweep Issues (Agenda Paper 2C)

Background

In this paper, the staff discusses issues for the Board to consider before finalising the ED that are consequential to issues that the Board has previously discussed. Those issues are:

A—Investment-return service

The Board previously tentatively decided that in the general model the contractual service margin (CSM) is recognised in profit or loss on the basis of coverage units that are determined by considering both insurance coverage and investment-return service. The Board also decided that an investment-return service can exist only when an insurance contract includes an investment component.

However, the staff have analysed subsequently that an investment-return service might be provided in insurance contracts that do not include an investment component. This is the case when a policyholder has a right to withdraw amounts from the entity, for example the policyholders’ rights to a surrender value or premium refund on cancelling the policy.

Staff recommendation

The staff recommended the Board revise its tentative decision to establish in IFRS 17 that an investment-return service exists only when an insurance contract includes an investment component, to instead specify that an investment-return service exists if, and only if:

There is an investment component, or the policyholder has a right to withdraw an amount

The investment component or amount the policyholder has a right to withdraw is expected to include a positive investment return

The entity expects to perform investment activity to generate that positive investment return

Board discussion

The Board members generally supported the staff recommendation, however some of the Board members were struggling with the notion of a “positive” investment return as mentioned in criterion b) and c) above. In the Board members’ view, it was not entirely clear whether ‘positive’ would mean ‘above zero’ or ‘above the market interest rate’. In a negative interest rate environment, a return could be perceived as positive if it was less negative than the market return. The staff replied that they had given this some thought, but decided not to propose additional guidance. When the Vice Chair proposed to add some explanation to the Basis for Conclusions (BC) on the amendments, some Board members were still not satisfied as the BC is not part of the mandatory guidance. The Vice Chair then proposed to add guidance to the main body of the Standard and its (mandatory) application guidance.

Board members emphasised that the criteria a) to c) above should be necessary but not determinative criteria for an investment-return service. They also generally agreed that the weighting between investment-return service and insurance service should remain a matter of judgement and not be mandated by the Standard. There was agreement that this amendment would not unduly disrupt implementation processes already underway, as many stakeholders have raised this issue with the staff and Board members.

Board decision

13 of the 13 Board members present agreed with the staff recommendation under the premise that the Standard would explain what is meant by ‘positive’ investment return.

B—Amendment to clarify that an entity need not separately disclose refunds of premiums

IFRS 17:100 requires disclosure of a reconciliation from the opening to the closing balances of the insurance contract liability. IFRS 17:103 requires an entity to separately disclose in that reconciliation investment components excluded from insurance revenue and insurance service expenses.

The Board tentatively decided to amend IFRS 17 to clarify the definition of an investment component, by stating that it is the amounts that an insurance contract requires an entity to repay to a policyholder in all circumstances. TRG members were concerned that this proposed amendment requires an entity to separate the amount payable when a claim occurs into:

The amount that would have been paid if the policyholder cancelled the contract (premium refunds)

The amount that would have been paid if the policyholder did not cancel the contract or make a claim (investment component)

The remainder (insurance service expense)

The staff is of the view that information about the insurance service result, including insurance revenue recognised in the period, would be obtained if the entity presented premium refunds separately or together with either investment components or premiums received.

Staff recommendation

The staff recommended to amend IFRS 17:103 to clarify that, in the reconciliation from the opening to the closing balance of the insurance contract liability, an entity need not disclose premium refunds separately.

Board decision

There was no discussion on this topic. 13 of the 13 Board members present voted in favour of the staff recommendation.

C—Amendment to clarify that changes resulting from cash flows of amounts lent to policyholders and waivers of amounts lent to policyholders are excluded from insurance revenue

When an insurance contract includes a loan component, the payment or receipt of amounts lent to and repaid by policyholders should not give rise to insurance revenue. IFRS 17 omits the exclusion of these amounts from changes in the liability for remaining coverage that give rise to insurance revenue.

Staff recommendation

The staff recommended the Board amend IFRS 17:B123(a) to add this exclusion and therefore clarify that those amounts are excluded from insurance revenue.

Board decision

There was no discussion on this topic. 13 of the 13 Board members present voted in favour of the staff recommendation.

D—Mutual entities issuing insurance contracts

Some stakeholders were concerned that with regard to mutual entities the explanations included in the BC) on IFRS 17 and the educational materials developed by the staff do not adequately reflect the nature of some mutual entities and might be used as prescriptive guidance for mutual entities applying IFRS Standards.

To address their concerns, those stakeholders suggested the Board clarify that the consideration in the BC on IFRS 17 apply only to some mutual entities and develop further considerations for the treatment of other types of mutual entities.

The staff think that it is clear that the BC on IFRS 17 only accompanies the Standard and does not set out IFRS requirements, nor does it define terms used in IFRS 17.

Staff recommendation

The staff therefore recommended the Board not amend IFRS 17 to develop specific requirements for mutual entities or amend the BC on IFRS 17.

Board discussion

Many Board members struggled with retaining the guidance in the BC. The term ‘mutual entity’ is applied differently in different jurisdictions and deleting the paragraphs or amending them to emphasise that they do not apply to all mutual entities would alleviate confusion. The staff replied that the requirements in IFRS 17 apply to all entities, whether they call themselves a mutual or not. Some Board members agreed with the staff that the BC does not state anything incorrect. They conceded that if the Standard had not been issued yet, the wording could be amended to avoid confusion, however amending existing paragraphs at this point could send a wrong signal, i.e. that a change was intended. Instead, more educational material could be issued after the amendments are finalised. The staff suggested to add a footnote to the basis to explain that not all mutual entities pay a residual interest to policyholders or simply stating that the term ‘mutual entity’ is not defined.

Board decision

13 of the 13 Board members present voted in favour of the staff recommendation under the premise that a footnote would be added to avoid any confusion in the BC.

Comment period for the Exposure Draft Amendments to IFRS 17 (Agenda Paper 2D)

In this paper the staff asked the Board whether they agree a comment period of 90 days for the Exposure Draft of proposed amendments to IFRS 17.

Board decision

There was no discussion on this topic. 13 of the 13 Board members present voted in favour of a 90-day comment period.

Since November 2018 staff and Board Members have been discussing IAS 19 and IFRS 13 in the context of a targeted standards-level review of disclosures with users of financial statements, and other stakeholders. At this meeting the staff provided the Board with a summary of the outreach undertaken and the feedback received.

Targeted Standards-level Review of Disclosures (Agenda Paper 11)

Background

One of the threads in the Disclosure Initiative is a targeted Standards-level review of disclosure requirements. The Board has been developing guidance for it to use when developing and drafting disclosure requirements. The Board decided to test the guidance by applying it to the disclosure requirements in IAS 19 Employee Benefits and IFRS 13 Fair Value Measurement.

Since November 2018 staff and Board Members have been discussing IAS 19 and IFRS 13 with users of financial statements, and other stakeholders. The Board wants to gain an understanding of the primary objectives of users and the information that would most effectively meet those objectives. The Board is also considering potential costs and other consequences of disclosing that information.

Staff summaries

At this meeting the staff provided the Board with a summary of the outreach undertaken and the feedback received. This has helped shape the approach the staff are planning to take in reviewing the disclosure requirements in IAS 19 and IFRS 13.

Agenda Paper 11A describes the outreach performed by Board Members and staff relating to the disclosure objectives and requirements of IAS 19 Employee Benefits and IFRS 13 Fair Value Measurement. It also summarises some of the lessons learned from outreach that might affect how the Board develops and drafts disclosure objectives and requirements in future.

Feedback from stakeholders and input received from the IFRS Taxonomy team is summarised in papers 11B (employee benefits) and 11C (fair value measurement).

Employee benefits

The staff state that the overarching message from users they spoke to is that today’s employee benefit disclosures are often not effective in meeting their objectives and they would like different information about employee benefits. Some users said that some of the information they receive today is only understandable to sophisticated investors rather than a ‘normal’ primary user. Almost all users they spoke to focus on defined benefit plans. They consider other types of employee benefits ‘harmless’.

Some users said the extent to which they use pension disclosures depends on the financial environment, with a greater focus when the financial environment is unfavourable. There are jurisdictional differences. In some countries defined benefit plans are either small or declining and detailed disclosures about them are often not relevant to their analysis of entities. Additionally, in some countries regulators require similar information to that required by IAS 19, which reduces the costs of meeting the IFRS requirements.

Fair value measurement

User feedback is that they are broadly happy with the information they receive today.

Staff recommendation

The staff are recommending that the Board explore different approaches to revising the disclosure requirements in IAS 19 and IFRS 13.

For IAS 19, the staff recommend that the Board explore whether new information about employee benefits would more effectively meet the needs of stakeholders than the information currently required by IAS 19. The Board would do this by developing specific disclosure objectives and using feedback from stakeholders to identify items of information that could effectively meet those objectives (refining the information by comparing them to existing IAS 19 disclosure requirements).

For IFRS 13, the staff recommend that the Board explore whether preparers would make more effective materiality judgements about fair value measurement disclosures if the Board developed specific disclosure objectives and linked those objectives to existing IFRS 13 disclosure requirements. Additionally, the Board should review any information required by IFRS 13 that it cannot link to a specific objective and any information identified by users as useful that is not currently required by IFRS 13. This Board should also consider feedback from preparers and other stakeholders about costs and other consequences.

Board Discussion

Outreach and overview

Board and staff members emphasised how much effort has gone into this. The real test of whether that effort was justified will be if improvements can be made to disclosure requirements. One Board member asked that the staff also get input from the Emerging Economies Group.

Board members emphasised that the disclosure objectives are very important, and could bring change. They become the focal point of the requirements.

Some Board members commented on the statement in Agenda Paper 11A (paragraph 5) that entities would need to comply with the objectives but “could” disclose suggested information to meet those objectives. The staff said that they will be revisiting the language used, such as “required” disclosures once they have detailed examples to work with. The staff think that real examples will help the Board work out the appropriate language and will also help people see how disclosure requirements are linked to the objectives. The staff also said, in response to a question from a Board member, that the Accounting Standards Advisory Forum (ASAF) also thought having some examples would help them provide feedback. A Board member said that as well as a disclosure objective and possible information they also expected to have some specific disclosure requirements. They also asked if disclosure objectives and user objectives were intended to be used interchangeably. The staff responded that they are different and they will address this confusion in future papers.

Technical analysis

Several Board members said the analysis highlighted to them that it will be important to ensure that the IASB be clear about its role. There are many areas where users have legitimate information needs, but it is not always the role of IFRS financial statements to provide that information. An example given was the introduction of the expected credit loss model relative to the information needs of central banks. The IASB needs to have a good understanding of the boundaries of an IFRS general purpose financial report that reflect their purpose. In a similar vein, the analysis demonstrated that users are more interested in cash flows than recognised assets and liabilities. It raises a question whether the IASB should continue to provide information that helps investors estimate future cash flows or whether the IASB should give more direct information (such as estimates of those future cash flows). Several Board members came back to this issue later in the discussion emphasising that it is important to have this debate. One member commented that if additional information is part of the IASB’s remit it could significantly increase the volume of disclosures.

Another aspect of this is the role the IASB plays in addressing what appears to be tension between what users say they want versus what preparers say is appropriate (and cost effective) to disclose. One Board member said that the users are “our customers”, so we should listen to them. Otherwise IFRS financial statements could become irrelevant. However, it is not just about identifying what users want but understanding why they want that information and how they use it.

Several Board members mentioned the expectations that some constituents have that some disclosure requirements will be removed from Standards. The Board might also need to think about disclosures that are badly executed.

It was suggested that the analysis indicates that people are looking for help in assessing materiality in relation to disclosures. Perhaps examples could be added to the Materiality Practice Statement. One member thought the Board should also think about difficulties some users said they had connecting some data back to amounts recognised in the financial statements.

It was noted that there was little feedback on IAS 19 from the taxonomy team, compared to IFRS 13. This is because a common practice exercise had not been undertaken for IAS 19. The taxonomy team plans to analyse IAS 19 disclosures and will use the XBRL SEC filings of foreign filers.

There was significantly less discussion about IFRS 13. One of the examples several Board members highlighted was the sensitivity analysis required by IFRS 13. It was not clear to some Board members what the objective of that disclosure requirement is or what users do with that information.

On the process the staff plan to take, Board members were generally supportive of the approach.

One Board member said the Board should step back and ask whether the package of proposed changes brings sufficient benefits to justify making the changes. In response a Board member said there could be value in seeing how a package of sound disclosure requirements can be improved with clearer objectives and presented in a different way. It could change the way the requirements are applied. One member suggested that the disclosure exercise might highlight that the accounting is wrong and would not want the Board developing new disclosure requirements for bad accounting.

Board Decisions

For IAS 19, the Board decided to explore whether new information about employee benefits would more effectively meet the needs of stakeholders than the information currently required by IAS 19. The Board will do this by developing specific disclosure objectives and using feedback from stakeholders to identify items of information that could effectively meet those objectives (refining the information by comparing them to existing IAS 19 disclosure requirements).

For IFRS 13, the Board decided to explore whether preparers would make more effective materiality judgements about fair value measurement disclosures if it developed specific disclosure objectives and linked those objectives to existing IFRS 13 disclosure requirements. Additionally, the Board decided to review any information required by IFRS 13 that it cannot link to a specific objective and any information identified by users as useful that is not currently required by IFRS 13. This Board will also consider feedback from preparers and other stakeholders about costs and other consequences.

Overview of the staff’s approach to revision (Agenda Paper 15)

In November 2017 the Board added a project to its agenda to revise IFRS Practice Statement 1 Management Commentary.

In revising the Practice Statement, the Board will focus on the role of management commentary as part of ‘broader financial reporting’. Broader financial reporting focuses on the information needs of primary users, but unlike financial statements it is not limited to providing useful information about the reporting entity’s assets, liabilities, equity, income and expenses. It includes:

Information about the reporting entity’s business model, strategy, risks and operating environment

Non-financial information

Non-financial performance metrics

Forward-looking information

Wider corporate reporting includes the management commentary, but is much broader than that. Since the Practice Statement was issued, many developments have taken place in wider corporate reporting:

Many national or supranational requirements for preparing management commentary or a similar report have been issued

Innovative narrative reporting initiatives have been developed both nationally and internationally

Specialised subject-matter or industry-specific frameworks have been developed by various organisations

Public policy reporting regulations have evolved

These developments may need to be reflected in the revised Practice Statement.

In addition, there are widely acknowledged gaps in narrative reporting that may need to be patched, such as short-term focus in reporting, lack of focus on matters that are important to the future of a business and fragmented discussion that fails to ‘tell a story’.

The current Practice Statement will be used as a starting point and then fill the gaps where it is incomplete, update it to reflect innovations and clarify where it is unclear. The staff expect to retain the existing approach of providing guidance based on principles rather than rules.

Based on the research to date, the staff recommend that the Board provide additional guidance on:

Staff recommendation

The staff did not recommend any decisions at that point. They asked the Board whether they have any comments or suggestions on the staff’s proposed approach to the revision.

Board discussion

The Board was generally satisfied with the staff’s summary of the project. There was some concern amongst Board members that the staff would be too focused on the German Accounting Standard No. 20 Group Management Report as that standard was mentioned several times in the paper. The staff confirmed, however, that this standard was only one example of a standard on management commentary and that all existing guidance around the world would be taken into account when drafting a new Practice Statement.

Some Board members mentioned that the Practice Statement should also give guidance on what to report about intangible assets, given the feedback from practice that the information provided by the financial statements is insufficient. One Board member suggested to provide some guidance on how the management commentary should be closed out (for example by way of a conclusion). It was also suggested to revisit the objective of the management commentary as it was very similar to that of financial statements and that could raise the question why information in the management commentary was not provided in the financial statements if the objective is the same. As regards the content elements, the staff confirmed that those should not be distinctive parts of the management commentary, but instead consider those content elements comprehensively in any part of the management commentary, so that all elements are covered.

The Board discussed the approach to the 2019 comprehensive review of the IFRS for SMEs, principles the Board could apply when determining whether and how to align Section 20 'Leases' with IFRS 16 'Leases', and the way forward and next steps.

Approach to the 2019 comprehensive review of the IFRS for SMEs Standard (Agenda Paper 30A)

Background

This paper contained a summary of the discussions held in February and March 2019 on the 2019 comprehensive review of the IFRS for SMEs Standard.

In those discussions, Board members expressed differing views regarding whether, and how to, incorporate new and amended IFRS Standards into the IFRS for SMEs Standard. The staff have identified two views.

View 1—the IFRS for SMEs Standard should be aligned with new and amended IFRS Standards, in determining alignment the Board should apply the alignment principles

The benefits of using full IFRS Standards as the basis for the IFRS for SMEs Standard would include efficiencies for preparers, auditors, regulators and users of financial statements prepared in accordance with either full IFRS Standards or the IFRS for SMEs Standard and a consistent financial reporting framework which supports efficiency in the education of accountants and users.

When aligning the IFRS for SMEs Standard with full IFRS Standards, the focus is on extracting the fundamental concepts of IFRS Standards and simplifying those concepts. This produces a Standard that is significantly shorter and less complex than full IFRS Standards.

View 2—the IFRS for SMEs Standard should provide a stable platform that is only updated for specific problems brought to the Board’s attention

The benefits of this approach are as follows:

It maintains a stable platform—it minimises disruption and the cost of a significant update for entities applying the IFRS for SMEs Standard

It reflects that the Board has not heard significant concerns about the current IFRS for SMEs Standard, and that it appears to generally be working well

It involves limited re-education of stakeholders

It minimises costs for jurisdictions who need to translate the Standard and related educational materials

It reduces the risk of unintended consequences of making significant changes

Staff recommendation

The staff recommended the Board proceed with View 1 as View 2 would be a significant departure from the original intention of the Board when developing the IFRS for SMEs Standard.

New IFRS Standards—IFRS 16 Leases (Agenda Paper 30B)

Background

This paper was for educational purposes only and the Board was not asked to make any decisions at this point. It analyses the three principles (relevance; simplicity; faithful representation) the Board could apply when determining whether and how to align Section 20 Leases with IFRS 16 Leases.

Relevance

SMEs widely use leasing as a source of financing. The staff therefore believe that IFRS 16 is relevant to entities applying the IFRS for SMEs Standard

Simplicity

Requiring a single lessee accounting model could be viewed as a simplification as users of SMEs’ financial statements will no longer have to analyse to separate accounting treatments for operating and financing leases. The simplifications already included in IFRS 16 (e.g. short-term leases, low-value assets, etc.) can be included in the IFRS for SMEs Standard and provide cost reliefs to entities applying the Standard. The staff recommends to incorporate further simplifications to IFRS 16 in the IFRS for SMEs Standard, such as:

Removing the quantitative threshold for low value assets and introducing a list of examples to assist companies identifying such assets

Providing additional relief to assist entities with identifying the discount rate to be applied when determining the liability

Providing additional relief to assist entities with determining and reassessing the lease term

Simplifying the requirements for subsequent measurement (reassessment) of lease liability

The staff believes that the additional simplifications proposed above will not reduce faithful representation.

Way forward and next steps (Agenda Paper 30C)

Background

The way forward will depend mainly on which view the Board will take in Agenda Paper 30A.

Should the Board confirm the staff’s recommendation of View 1 and agree to use the alignment principles of relevance, simplicity and faithful representation, the staff would proceed as planned.

If the Board agrees with View 1, but is concerned that there is insufficient implementation experience available during the 2019 review to decide whether and how to align the IFRS for SMEs Standard with IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16, the staff would propose a modification to the planned approach. The modified approach would consist of two stages. Stage 1 would be a 2019 Request for Information (RFI) that addresses IFRS Standards and amendments with effective dates up to and including 1 January 2016 that are not currently included in the IFRS for SMEs Standard. The second stage would be a 2022 RFI, which would address IFRS Standards and amendments with effective dates up to and including 1 January 2019.

If the Board agrees with View 2 in Agenda Paper 30A, the staff recommend the Board not proceed with an RFI at this time, but rather develop a strategy that would allow it to come to a consensus on the purpose and role of the IFRS for SMEs Standard.

Staff recommendation

Consistent with the staff recommendation in Agenda Paper 30A, the staff recommended to proceed with Option 1.

Board discussion

The Board discussed the three papers together. Most Board members struggled with the dichotomy of the views the staff had presented in Agenda Paper 30A, leaning towards View 1. In the Board members’ opinions, the two views are not mutually exclusive and elements of both views could be combined. The Chairman stated that the Board should strive for a strong alignment of the IFRS for SMEs Standard with full IFRS, while keeping the platform simple and stable. Arguments in favour of View 1 included that the Standard is called “IFRS” for SMEs, which suggests that the Standard is somewhat aligned with full IFRS. One Board member said that if the Board were to support View 2, the Standard should be called “Accounting Standard for SMEs, issued by the IASB” to indicate departure from full IFRS.

The Chairman indicated that principles might not be helpful when reviewing the IFRS for SMEs as it is a practical Standard that requires a practical approach. Most Board members agreed with the Chairman, with one Board member saying that the principles would be fulfilled with any new accounting Standard and are therefore unhelpful. Board members stated that in order to determine whether a new accounting Standard should be incorporated in the IFRS for SMEs, the Board should examine the associated benefits for users of financial statements of an SME. Agenda Paper 30B was perceived as helpful in that regard. This benefit should then be compared with the cost (especially for the data gathering) the SME incurs to apply the accounting requirement and the general ability of a typical SME to implement the change. One Board member said that it should be considered that the cost-benefit analysis is different for an SME compared to a public interest entity (PIE), but costs could be reduced by allowing for longer implementation times, which would then, however, delay the whole process of reviewing the IFRS for SMEs Standard.

Some Board members emphasised that the scope of the IFRS for SMEs Standard does not include any size restrictions, as long as an entity is not publicly listed. It could therefore happen that a billion pound company applies the IFRS for SMEs Standard. The relative cost for this entity to apply, for example, the requirements of IFRS 16 could be lower than for a 50-employee entity. A universal cost-benefit analysis might therefore be challenging. This was countered, however, by the Chairman, who stated that as far as the Board knows, the IFRS for SMEs Standard is currently only applied in jurisdictions where its application is only allowed for actual small or medium-sized entities. Some Board members agreed with that statement and warned that a size discussion might make the review much more difficult.

There was some discussion about the “deluge” of new Standards that is anticipated to be incorporated in the IFRS for SMEs if the Board followed View 1 in Agenda Paper 30A. This “deluge” is a result of not changing the IFRS for SMEs for a long time with the purpose of keeping a stable platform. While some Board members suggested not to overwhelm constituents with too many new requirements, others said that the impact could be quite limited. When the IFRS for SMEs Standard was published at first, the Board already presumed some of the upcoming changes in full IFRS and the Standard could therefore be more aligned than currently perceived. For example, the ‘solely payments of principal and interest’ (SPPI) test in IFRS 9 was based on the IFRS for SMEs Standard.

As regards what should be asked in the RFI, Board members were split between a high-level questionnaire (asking which approach should be selected for the review of the Standard) and a reasonably specific questionnaire (asking more detailed questions as to how the new Standards should be incorporated). In any case, Board members suggested not to be presumptive in the RFI as to which Standards to incorporate. The RFI should be open and explaining all costs and benefits, without making a judgement. Some Board members suggested to provide alternative “subsets” of new accounting Standards in the RFI that could be incorporated with the remaining Standards to follow at a later review.

The staff summarised that based on Board member comments, they would work under the assumption of only one RFI that included the points discussed in this session. They acknowledged that Board members were leaning towards View 1, but constituents should not be overwhelmed with having to implement too many new requirements. The RFI should be strategic and comprehensive, but relatively specific and provide several alternatives without being presumptive.

This session was an education session at which the staff asked the Board for any suggestions to improve the understanding and clarity of the model that has been developed thus far. The Board is also asked whether any further analysis is required from the staff in respect of any of the topics discussed during this session. The Board was not asked to make any decisions.

Cover Note (Agenda Paper 9)

This session was an education session at which the staff asked the Board for any suggestions to improve the understanding and clarity of the model that has been developed thus far. The Board is also asked whether any further analysis is required from the staff in respect of any of the topics discussed during this session. The Board was not asked to make any decisions.

Principles of the model: a summary (Agenda Paper 9A)

The purpose of this paper was to provide some background as to why the Board is developing an accounting model for regulatory assets and regulatory liabilities arising when an entity subject to defined rate regulation supplies goods and services and a summary of the principles that are underlying in the model.

In defined rate regulation the regulatory framework establishes a binding regulatory agreement through which the entity has a right to supply specified goods or services and charge a rate that is designed to compensate the entity for the goods or services with the aim of making it viable for the entity to fulfil specified requirements for quality, quantity and availability of supply of the goods and services.

The regulatory agreement establishes the total allowed compensation that the entity is entitled to charge to the customers for goods or services supplied during the period. It also determines in which periods that total allowed compensation is included in the rate charged to customers. Sometimes, the regulatory agreement includes some of the total allowed compensation in the rate charged to customers in a period that differs from the period when the goods and services are supplied. This causes timing differences that will be trued up later.

Variances between the estimated and actual amounts used in the rate calculation that are at the risk of customers and that exist at the end of an entity’s reporting period create rights or obligations for the entity to adjust the future rate charged to the customers as a result of goods or services already supplied. These rights and obligations are incremental to those reported applying IFRS 15 Revenue from Contracts with Customers. Although the adjustments to a future rate will give rise to incremental future cash flows, the right or obligation to make that adjustment does not give the entity the right to receive cash or the obligation to pay cash and is therefore not a financial instrument within the scope of IFRS 9 Financial Instruments. However, not recognising these incremental rights as assets and incremental obligations as liabilities gives users of financial statements incomplete information about an entity’s financial position and financial performance.

The staff developed a model whose purpose it is to supplement the information provided by IFRS 15 and other IFRS Standards. The core principle of the model is that an entity recognises regulatory assets (right to add an amount to a future rate), regulatory liabilities (obligation to deduct an amount from a future rate) and regulatory income or expense (the movement between opening and closing balances of regulatory assets and liabilities).

Board discussion

Board members were generally supportive of the description of the model’s principles described in Agenda Paper 9A and appreciated the clarifications and changes in wording proposed by the staff.

One Board member noted that the Board should discuss issues brought by the duration and renewal of regulatory agreements in the future.

The Board discussed situations when there is a difference between the timing of depreciation of a property, plant and equipment (PP&E) asset and the time the regulatory agreement allows to include the expense in the rate charged to customers. For example, if two entities use different patterns of depreciation but are compensated in the same way, they would have different amounts of regulatory assets and liabilities on the balance sheet. The staff noted that in such instance the two entities would also have a different PP&E balance and accordingly the overall picture would be the same. The staff was asked to clarify that the depreciation reflects the pattern of consumption of the asset.

Several Board members wanted a clarification of what is meant by “goods or services supplied during the period”. The staff noted their intention to have a wide interpretation, which would include not only the goods directly delivered to customers (e.g. water, electricity) but also wider services provided (e.g. providing a 24 hour access to the utility network). Board members also noted that there may be costs that are expensed in the period and do not relate to goods or services actually delivered to customers but would still be allowed in the total compensation that the entity is entitled to charge to customers. The staff clarified that if costs recognised as an expense in the current period are allowable under the regulatory agreement, the presumption is that they relate to goods or services provided in the period. The staff will review the wording used to clarify this point.

Two Board members raised concerns over the staff’s suggestion that the model should not describe the unit of account as ‘individual timing differences’. They noted that although there may be practical reasons for grouping individual items for measurement, presentation and disclosure purposes, this does not impact the Board’s tentative decision that that the model should use the individual timing differences that create the incremental rights and obligations arising from the regulatory agreement as its unit of account.

No decisions were made.

Scope and recognition principles (Agenda Paper 9B)

The paper sets out the Board’s tentative decisions with regards to the scope and recognition principles of the model described in Agenda Paper 9A and asks the Board whether it continues to find these decisions appropriate.

The paper then introduced two new topics for the Board to consider: derecognition and fines.

The staff’s preliminary view was that a regulatory asset or liability would be derecognised when an entity recovers part or all of a regulatory asset or fulfils part or all of a regulatory liability.

When a fine is imposed by the regulator, or another government body, the obligation is typically recognised as a liability until payment if the recognition requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets are met. Even if the fine is deducted from future rates, the staff are of the view that an entity recognises a liability for the obligation to pay the fine. The staff recommend the Board extend the definition of the model’s definition of a regulatory liability that would include obligations to deduct fines from the future rate and introduce guidance clarifying that an entity applies the requirements in IAS 37 to the recognition of fines.

Board discussion

One Board member asked the staff to clarify in the definitions of regulatory asset and regulatory liability that the “rate(s) to be charged to customers in future periods” means the “rate(s) to be charged to customers in future periods for future deliveries of goods or services”.

Regarding the staff’s proposal to require recognition of a present obligation for fines which will be settled through the deduction of the amount from the rates to be charged to customers in future periods, some Board members noted that an example would be more useful than a requirement given that the principles in IAS 37 and the regulatory model appropriately address the issue. Board members also noted that if fines are imposed on an entity and benefit the customers rather than the society as whole (because they are deducted from the rates to be charged to customers), it should be assumed that they are part of the total compensation.

No decisions were made.

Measurement principles (Agenda Paper 9C)

The model uses a cash flow-based measurement technique that would require an entity to estimate the future cash flows arising from regulatory assets or regulatory liabilities, updating those estimates if change occur. These estimated future cash flows are discounted, keeping the discount rate established at initial recognition unchanged, unless the regulatory agreement changes the future cash flows by changing the interest rate or return rate.

When measuring a regulatory asset, the starting point is to identify the amount that will be added to future rate(s), because the total allowed compensation for goods or services already supplied exceeds the amount already charged to customers for those services. The model requires an entity to estimate future cash flows arising from each regulatory asset recognised using either the ‘most likely amount’ method or the ‘expected value’ method. The entity would also consider the risks associated with those cash flows. Estimated cash flows would be updated at each reporting date.

Once an entity has estimated the amount and timing of the future cash flows arising from a regulatory asset, the entity would then consider the effects of the time value of money and risks inherent in the cash flows between the time the regulatory asset or regulatory liability comes into existence and it is recovered or fulfilled through the future rate(s) charged to the customer. The interest rate or return rate to reflect the time value of money is typically reviewed intermittently and updated to reflect changed circumstances.

When measuring regulatory liabilities, the entity applies the same requirements for the estimation of future cash flows as for regulatory assets. As regards the interest rate or return rate, the rate should be adequate to sufficiently charge the entity for the time value of money and risks inherent in the cash flows.

In terms of describing the measurement basis, the staff suggest to specify the measurement basis that the model’s cash flow-based measurement technique applies, as a modified historical cost measurement basis (modified to updated it for changes in estimates of future cash flows).

Board discussion

The Board discussed the risks that an entity would consider when estimating future cash flows. The following observations were made:

The uncertainty over whether certain costs are allowable or not under the regulatory agreement should also be taken into consideration.

One Board member considered that any significant uncertainty about the outcome of the regulatory rate approval process should be taken into account when estimating cash flows, rather than through a premium to the discount rate.

One Board member challenged the assumption that demand risk is typically low and questioned whether some impairment test would be necessary when that is not the case. The staff did not favour this approach, noting that the most likely amount or expected value that will be used to estimate the cash flows take into consideration the risks to which the entity is exposed and additional disclosures around those will be required. One Board member noted the need for the Basis for Conclusions to comment on the reason for not having specific requirements in relation to demand risk.

The Board also discussed the recommendation not to require discounting of the estimated cash flows if the effects of the time value of money and risks inherent in the cash flows are not significant. It should be clarified whether this requirement is (i) an absolute practical expedient, or (ii) allowed as long as the entity has a reasonable basis to consider that the effects are not significant, or (iii) allowed if the entity can prove that the effects are not material.

Board members discussed the need to complement the description of “typical” transactions and circumstances in the model with references to the objectives and principles that the model is trying to achieve in order to cover a wide range of situations and avoid a rule-based approach.

The staff confirmed that there could be situations in which an entity is required to calculate an implicit regulatory rate of return. This question will be addressed at a later stage.

One Board member disagreed with the staff’s assertion that an excess charge on a time band with a net liability position would be rare. They also asked to consider when determining whether a regulatory liability is onerous as to whether the same rate applies to an entity’s regulatory assets and liabilities.

One Board member wanted a stronger rationale to describe the measurement basis as a modified historical cost measurement basis than currently presented by the staff, while another agreed with the assessment although noted that they would not describe the basis as “modified”.

The staff recommended in December 2018 that regulatory assets and regulatory liabilities that relate to expenses or income that will be included in/deducted from the future rate(s) when cash is paid/received should be measured at the same amount as the underlying liability or asset. Board members expressed mixed views during that meeting. The staff has now clarified that such approach is an exception to the measurement approach used in the model for all other regulatory assets and liabilities. As a result, the staff intends to ask the Board to reconsider this recommendation. Board members welcomed this clarification and the proposed future discussion. Some members noted the need for a cost-benefit assessment to find the right balance between the need for transparency to the users of financial statements and the operational costs to preparers.

No decisions were made.

Summary of tentative decisions made to date (Agenda Paper 9D)

This paper was provided for information purposes only and summarised the Board’s tentative decisions to date and outlined staff views on the consistency of those decisions with the refined description of the model in Agenda Papers 9A–C.

There was no discussion on this paper.

Rate-regulated Activities: principles of the model—how the description has evolved (Agenda Paper 9E)

This paper was provided for information purposes only and outlined the refined principles summarised in Agenda Papers 9A–C using a slide presentation.

The Board discussed possible improvements to disclosures about acquisitions and whether entities should be given relief from having to assess goodwill for impairment annually.

Goodwill and Impairment – Cover Paper (Agenda Paper 18)

Background

The IASB is assessing whether it could improve the accounting for goodwill. The Board plans to publish a Discussion Paper in the second half of 2019, with a view to potentially amending IFRS 3 Business Combinations and IAS 36 Impairment of Assets.

At this meeting the Board discussed possible improvements to disclosures about acquisitions and whether entities should be given relief from having to assess goodwill for impairment annually.

Better disclosures for business combination (Agenda Paper 18A)

This paper was originally discussed at the April IASB meeting. The staff have added annotations reflecting comments made at the April meeting and the staff responses to those comments. In this summary we focus on the new staff analysis.

IFRS 3 disclosures

Some Board members have previously expressed a view that boilerplate disclosures about business combinations could be caused by IFRS 3 not having clear enough disclosure objectives.

The staff think it would be helpful to have an objective that explains why users need the information being requested. That objective would be “to evaluate the extent to which the key objectives of the business combination are being achieved.”

The CODM (Chief Operating Decision Maker)

The staff have previously suggested that information on subsequent performance should be based on how the CODM monitors and measures whether the key objectives of the business combination are being achieved in the entity’s internal reporting.

In April, some Board members were concerned that a CODM approach might mean information on material business combinations might not be provided because it is not the CODM monitoring the acquisition. Some Board members thought that the threshold at which disclosure would be required should be set at a lower level of management than the CODM and if the information on subsequent performance monitored by that level of management is material, this information should be disclosed. Some Board members thought that some minimum prescribed information on subsequent performance should be required if the information is material to users, even if the CODM does not monitor the new investment. Such an approach is consistent with IFRS 8 Operating Segments, which requires specified disclosures even if they are not provided to the CODM. However, the staff think that identifying specific measures for subsequent performance that are suitable for all business combinations and satisfy needs of all users would not be feasible.

The staff continue to recommend that disclosure requirements be developed based on information provided to the CODM and that the Discussion Paper seek feedback on whether some minimum amount of information should be required, even if it is not information provided to the CODM.

Removing existing disclosure requirements

The Board decided, early in the project, not to conduct a full review of IFRS 3 disclosures. Some Board members are concerned that the discussions have focused mainly on adding disclosure requirements and that they could be criticised for not considering whether some current requirements do not generate useful information. The staff have therefore identified three items that could be candidates for removal, using the IFRS 3 post-implementation review feedback. The staff are also suggesting that the requirement to disclose revenue and profit or loss of the combined entity as if the business combination had occurred at the beginning of the annual period could be replaced. Instead, an acquirer should disclose revenue, operating profit or loss before acquisition-related transaction and integration costs and cash flow from operating activities since the acquisition date. Some Board members thought that this alternative approach might not provide sufficient information for users to understand the full year contribution of all material business combinations. They also noted that the equivalent information under US GAAP is required to be provided for two years.

Net tangible assets

In April some Board members said that a suggestion to require a sub-total on the statement of financial position highlighting tangible net worth should be investigated further.

The staff think a sub-total before goodwill and all intangible assets (tangible net worth) might provide information that in some circumstances could be “misleading” such as when the intangible assets have “finite and well-defined lives.” The staff see goodwill as being different. They state that although goodwill is an economic resource and has the potential to produce economic benefits, “direct measurement of goodwill is not possible and therefore, goodwill can only be measured as a residual amount.” They also state that goodwill also does not generate cash flows independently of other assets or groups of assets, and often contributes to the cash flows of more than one cash-generating unit (CGU).

The staff have suggested two candidates for the Board to consider as a suitable measure of net assets excluding goodwill:

(a) Total assets before goodwill, less total liabilities

(b) Total equity before goodwill

The staff have also said the Board should consider whether the selected sub-total should be required as a natural subtotal on the face of the statement of financial position, in a footnote or as a “free-standing disclosure, on the face of the statement of financial position.”

The staff think the Board should include a brief discussion of such sub-totals in the Discussion Paper.

Question for the Board

The staff plan to ask the Board for its preliminary views for the Discussion Paper at the June IASB meeting. To help the staff prepare for that meeting the staff have asked Board members if they have any further comments on their ideas about the disclosure objectives and requirements. Accordingly, no decisions are expected to be made at this meeting.

Board Discussion

The discussion was broad-ranging. Board members said it was difficult to look at components of the proposals. It is the whole package that needs to be considered. Several saw the package as offering some relief in terms of impairment testing, but to justify this, entities would need to be willing to provide more information about business combinations.

Although several Board members said they hadn’t changed their views on some matters, the important thing is that the Discussion Paper brings out all of the issues. One Board member said that it was critical to them that there be a requirement to provide some pro-forma information. Other members said that the requirements about pro-forma information are not sufficiently clear.

Consistent with this, a member said that qualitative explanations of differences in accounting policies, for example, are not a substitute for quantitative adjustments that demonstrate the actual implications of the change.

A member thought the CODM focus was not the best approach because the CODM focus was developed for segments. The member thought that acquisitions are likely to be monitored at lower levels. They thought a materiality overlay would be more effective.

Another member said that they want to understand why materiality does not seem to be drawing out information or filtering out excessive information before shifting to a CODM approach. However, seeing the different metrics they use to monitor business combinations could be helpful information for users. Other members expressed similar views to this. One member said that this is probably the most practical way to go.

One member asked what was expected of an entity if an acquiree is fully integrated into a segment very quickly. Is monitoring of that segment by the CODM and reporting that segment sufficient to meet the objective of assessing the business combination? The staff responded that this would not be monitoring the business combination and assessing them against their expectations. The entity would be expected to explain that in the financial statements.

One member questioned what the staff would expect in terms of monitoring something like a pharma business with a long horizon before some success might be expected.

One member said they were not supportive of having minimum disclosure requirements. Business combinations are undertaken for different reasons and the member thought it would be difficult specifying minimum disclosures when they are unlikely to be relevant to some business combinations. It is important if there are minimum disclosures that their purpose is clear. The staff are exploring this and at this stage do not support establishing minimum requirements for the reasons expressed by the Board member.

There were some concerns about possibly “relegating to the notes” the “before and after goodwill” measures of equity. The Chairman thought this would make the disclosure less effective.

If there is a requirement to disclose costs, it will be important to clarify what the Board means by “costs” and what “integration costs” mean, for example.

The issue of the inconsistency in the accounting for internally created intangible assets and the equivalent acquired intangible assets is significant and has been raised by many standard-setting bodies. It is something that the IASB cannot ignore.

One member asked if more information about fair value sitting in OCI of the acquiree would be helpful.

Another member said that because the Board has still not decided whether to proceed with the approach to writing disclosure objectives and requirements as discussed in the Disclosure Initiative (see Agenda Paper 11). The member would object strongly to implying that this is the approach to which the goodwill project is committed.

Relief from mandatory annual impairment test (Agenda Paper 18B)

Indicator-based impairment test

The staff considered four approaches to moving away from an annual test of impairment. The Board could propose requiring a quantitative test of goodwill for impairment:

in the first year after a business combination, but subsequently only when there is an indication of possible impairment;

at least annually (and more frequently whenever there is an indication of possible impairment) for the first few years after a business combination, perhaps 3–5 years and subsequently only when there is an indication of possible impairment;

less frequently than annually, for example once every 3 years, and in the intervening periods only when there is an indication of possible impairment; or

only when there is an indication of possible impairment.

The staff intend to recommend that the Board should focus on the indicator-only approach (d), and the rest of the paper considers that approach.

Costs and benefits

The staff think an indicator-only approach could be less costly to implement than the current model and allow entities to apply the same impairment test for all CGUs, regardless of whether they contain goodwill or some identifiable intangible assets. On the other hand, the staff think such an approach is marginally less robust than the current model, could lead to some loss of information that users of financial statements might find useful and could slightly weaken governance over impairment tests.

Disclosure

In response to feedback from some users, the staff think the Board should consider requiring disclosure of the facts and circumstances triggering an impairment test, even if it did not eventually result in an impairment loss or reversal.

Indicators

IAS 36 includes matters that could indicate that an asset is impaired. The staff think that if the Board decides to propose an indicator-only approach, it might want to review those matters. In particular, the Board could consider adding “the failure to meet the key objectives of the acquisition” as an indicator.

Intangible assets with an indefinite useful life

The staff note that IAS 36 requires that intangible assets with an indefinite useful life be tested for impairment annually. The staff think that if the Board supports moving to an indicator-only approach for goodwill it should do the same for all intangible assets. In other words, intangible assets with an indefinite useful life would only have to be tested for impairment if there is an indication of impairment.

Question for the Board

The staff plan to ask the Board for its preliminary views for the Discussion Paper at the June IASB meeting. To help the staff prepare for that meeting the staff have asked Board members if they have any other issues they will need to consider if the Board decides to adopt an indicator-only impairment testing model for goodwill. Accordingly, no decisions were made at this meeting.

Board Discussion

The Chairman asked how the indicator-only approach compares to the US model. The staff said they are “similar but different”. The US has a “more likely than not” compared to “an indicator that there may be an impairment”. The sense was that the IASB’s threshold is lower—i.e. quantitative tests would need to be undertaken with the IASB proposal more frequently than if the US model was used. However, because some of the ways the indicators are expressed are also different it is difficult to assess what the practical differences would be. A member commented later in the session that if the IASB adopts an indicator-only approach any ED should start with the US approach and improve it based on what could be 10 years of experience by then. One Board member noted the US test is in relation to fair value and not value in use.

A Board member said they had difficulty understanding the objective of this approach because the original objective was to address a perceived problem of “too little, too late”. They were not sure if the problem is with the Standard or with application and enforcement of the Standard. Another member agreed that “too little, too late” was not being achieved but thought that the indicator approach was not going to make this issue any worse. It is an approach that has existed for a long time for other assets and if it works effectively it will eliminate a lot of obviously unnecessary tests of CGUs that are clearly operating profitably and are not impaired. The Chairman remarked that “the real problem is not too little, too late, it is too late and then a lot”. A member responded that they were not hearing from investors that “too little, too late” was a significant problem. The information content in any actual impairment is small.

The Vice-Chair said she had been persuaded to support an indicator approach, which was not her original inclination. She thought it should be accompanied by more powerful disclosures to give discipline. The Chairman asked if the reasons for the business combination and the expectations can be linked to the impairment indicators.

A Board member who did not agree with moving away from mandatory annual testing thought that any company with significant amounts of goodwill will always be doing a quantitative test. They were also concerned that if an entity is not doing the tests regularly it could undermine the quality of the testing. Another Board member said they agreed with that view, for the same reasons. They found it odd that the Board could not improve the impairment test and that the Board was now thinking of doing the opposite, by relaxing the test. If the Board does go ahead with an indicator approach they would keep a mandatory assessment immediately after the acquisition. One of the Board members who had spoken earlier agreed with these members. They were particularly concerned that goodwill gets absorbed into a CGU and by the time they assess for impairment there has been significant value loss but it is absorbed by the pre-acquisition headroom in the CGU.

Another member said that the effectiveness of the proposed approach rests with how well the indicators are specified. They asked if there was any evidence in the US of entities opting into the indicator approach (where it is an option) of concerns, failure to impair, or of opportunistic behavior. Another member said there is evidence of entities with book value of equity exceeding market value of equity, but they are not recognising impairments.

Another Board member said that goodwill and indefinite-life assets are different and would need convincing that they should have the same (indicator-only) approach to impairment.

A member suggested that the IASB could require an explicit assertion that the carrying amount of goodwill is recoverable.

A member emphasised the point that had been made at the beginning of the session that the Board needs to look at this as a package. As the session concluded, the Chairman said that this is a very important issue and it is also a reputational issue for the IASB.